Taxation

International tax planning strategies for Global Companies

Companies that conduct business in multiple nations face a significant obstacle when it comes to corporate international tax planning. They must strategically plan in order to avoid dangers like international double taxation, in which they are taxed differently on the same income in different countries. This kind of planning is also essential to staying in compliance with the tax laws of each country in which they operate. These laws and regulations are complicated, very different from one jurisdiction to the next, and frequently change. Digital e-filing requirements are increasingly affecting the regulations of many nations, making things even more complicated.

Strategic international tax planning is necessary for success in a global economy. In the global marketplace, businesses that do not implement strategic international tax planning would suffer a significant competitive disadvantage. When a rival enters a market with a higher tax rate, they must sell lower-income customers higher-priced goods. Companies that aren’t familiar with double tax treaties, cross-border transfer pricing rules, and international tax laws are much more likely to pay too much in foreign taxes and penalties.

A significant competitive advantage accrues to businesses that participate in proactive multinational tax planning. When a competitor enters a market where the tax burden is lower, they will sell their products at lower prices and make more money. Cross-border tax planning is necessary to reduce tax burdens like high withholding taxes, customs and duty costs, and international corporate tax rates. Taxes ought to be taken into account by businesses as a regular expense that has the potential to lower their income at the top.

Need of Tax Planning for Global Set-ups

The leader of a global startup must quickly decide how to prepare for taxation in multiple jurisdictions around the world. If comprehensive upfront planning isn’t done, the fledgling start-up could face severe tax consequences that would force it out of business.

One of the first things an entrepreneur should do is talk to lawyers and accountants who know a lot about international taxation and international business. These experts can direct you through the complex web of tax laws and regulations. By taking this step early on, pitfalls will be avoided, and the business won’t be hampered by improper international tax handling.

The global entrepreneur must first respond to two fundamental but broad inquiries: What ought to I be? and where should my business be based? Specifically, how should the entity be organized? If they choose to establish their headquarters in one jurisdiction over another, what are the tax repercussions? Another important issue is incorporated into the second question: How can the entrepreneur effectively avoid being taxed at 100% of his income or paying double tax? If at all possible, membership in the “100% club” should be avoided. The effective utilization of the U.S. foreign tax credit is one of several solutions to double taxation.

Effective international tax planning can provide an entrepreneur with yet another form of a competitive advantage over competitors who are not as knowledgeable or skilled in the development of international tax strategies, despite the difficulty of the process. To put it another way, entrepreneurs will find that the extra work they put in to plan their taxes early is well worth it.

International Tax Planning Strategies or Global Companies

There are multiple ways for companies having a global setup to deal with international businesses without being restricted by cross-border tax complications.

Few Tax planning strategies can be:

Income Shifting Strategies

Transfer pricing of goods and intangibles is a tax planning strategy in which profits from countries with high taxes are moved to countries with lower taxes. A nation with high taxes could see a significant drop in tax revenue as a result. On the other hand, paying current taxes is reduced by shifting the amount of tax collected to subsequent years. A study typically backs up the cost of moving goods or intangibles, ensuring that transfer pricing is within industry norms.

Strategies for Offshoring Taxes

A slew of new opportunities for tax planning has emerged as a result of the rising trend of businesses outsourcing numerous aspects of their operations to various foreign businesses. If someone owns a business, they owe a lot of taxes if they live in a state with a lot of taxes. It’s possible that the person  paying more taxes than necessary if their  business does all of its business in another country and they have no physical presence or local transactions there. They are responsible for ensuring that your corporate structure complies with the company tax laws in your home country if your investment or business is based in a jurisdiction without taxes.

Use of Tax Shelter

After spotting the ideal opportunities, a lot of people have made it a practice to relocate to nations that provide lucrative tax advantages. Because most high-tax nations only impose taxes on residents who remain within their borders, this is becoming increasingly feasible as people’s lifestyles become more mobile. The exception is the United States, which taxes its citizens regardless of where they live. There are approximately forty tax havens worldwide. Most of the time, they are wealthy, small countries that are often islands with few people, few natural resources, and well-developed communication networks. Due to the fact that tax havens reduce tax revenues in countries with high taxes, the OECD^[1] published a list of tax havens and urged them to improve their information sharing with other nations.

Regulatory Arbitrage

This method of tax planning takes advantage of differences in national regulations. If two nations handle an overseas branch differently, resulting in a difference in tax status, there is room for tax reduction. The corporation may establish a branch outside of its home country that is treated as an offshore incorporated entity in the host country while being taxed as an offshore unincorporated “branch” in its home country. In a similar vein, in the event that two nations disagree regarding the hybrid securities’ tax status, the Corporation has the option of issuing affiliate-purchased hybrid financial instruments featuring both equity and debt features. The affiliate’s tax authorities view the hybrid instruments as debt, whereas the parent country’s tax authorities view them as equity.

Income Conversion

Dividends may have a different tax rate than capital gains or interest income due to the fact that not all forms of income are taxed at the same rate; This is a tax planning strategy that allows dividend income to be subject to withholding tax but not interest income. A holding company can lend money to a subsidiary and earn interest to take advantage of these distinctions. The money is then distributed as dividends to the parent company. Dividend income has replaced interest income. Additionally, it may reverse dividend income into interest income.

Corporate Inversion

Transferring corporate identities is a strategy for tax planning. The parent corporation is the subsidiary, and the subsidiary is the parent company, reversing the organizational structure. Companies in the United States that want to stop paying tax in the United States on their international earnings use a method known as “expatriation.” What role does this strategy play? The global tax system is utilized by the United States. A subsidiary in a nation with a territorial taxation system is chosen by the parent corporation in the United States. The parent corporation in the United States becomes the subsidiary, and this subsidiary becomes a parent. Which approach is the most effective? A foreign shell corporation can be established in a tax haven like the Cayman Islands by the parent company in the United States. In exchange for the parent company’s shares from these shareholders, the shell company issues its shares to the parent company’s shareholders. The shell company may issue shares to the parent company in exchange for the properties of the parent company.

Tax Deferral

An international company’s subsidiary does not repatriate the parent company’s earnings (dividend or interest) as part of this tax planning strategy. As a consequence of this, neither the affiliate nor the parent corporation owes any taxes in their respective home nations.

International Holding Company

A holding company is an independent subsidiary or regional headquarters. Establishing a foreign holding company is a tax planning strategy. It was established in a low-tax state and had the potential to save a multinational company millions of dollars in taxes. A “pure” holding company is one that does not make money or run any operations. Maintaining a “long-term stake” in one or more independent businesses is its primary objective. A holding company with a US parent company that communicates with its EU subsidiaries is known as a Euro-holding company

Avoidance of Double Taxation

The entrepreneur will be able to better consider the kinds of situations that could result in double taxation upon having a solid understanding of the fundamentals of the tax structures of a country. Take, for instance, a “World Cup Soccer” competition in which each referee adheres to their own set of guidelines. Conflicts will always arise. In international tax law, the rules remain the same. Conflicts between nations with different taxing privileges can result in taxpayers being subject to double taxation. In fact, multiple jurisdictions may levy taxes if handled improperly, posing the risk of an overall tax rate exceeding 100 per cent of income!

There are a variety of ways double taxation can occur, including the following:

The start-up is subject to taxation from multiple nations: The start-up is claimed to be a citizen and subject to taxation in two nations.

The transaction is subject to taxation from multiple nations: The profits from a particular transaction, according to two nations, should be taxed in accordance with their national laws.

Divide the tax bill by party and transaction: One nation asserts that it is entitled to tax the startup because it is a citizen of its nation, while the other nation asserts that it is entitled to tax the transactions because they take place within its borders.

Prepare your business for changes to international regulations

Constant changes to international regulations and taxes will undoubtedly present new tax planning challenges to global tax teams. Changes to regulations include the following:

• The Base Erosion and Profit Shifting (BEPS) initiative of the OECD introduces a global minimum tax and tax policies for the digital economy.
• A Mandatory Disclosure Regime (MDR), country-by-country (CbC) reporting requirements, and a directive on reporting for cross-border arrangements are all being proposed by the EU.
• The implications of the Tax Cuts and Jobs Act of 2017 (TCJA) on multinational corporations in the United States are still being worked out, with the IRS and Department of the Treasury regularly releasing new regulations and instructions.
• There are a lot of countries that have tax agreements with other countries that have an effect on whether or not a company has to pay taxes in other places and how much they are. This is an attempt to get rid of double taxation, which makes it hard to do business internationally.
• For many of the BEPS-required documentation filings and taxes, electronic filing is becoming a requirement in many nations.

Greater transparency, which is one of the essentials of corporate tax planning, will be required to maintain compliance with these standards and regimes. You must also ensure that you have control over your tax data. Take advantage of automated data management and easy access to relevant tax content by updating your tax technology to gain control and transparency

How to Avoid Pitfalls?

Prepare your business for changes to international regulations. Constant changes to international regulations and taxes will undoubtedly present new tax planning challenges to global tax teams. Changes to regulations include the following:

The Base Erosion and Profit Shifting (BEPS) initiative of the OECD introduces a global minimum tax and tax policies for the digital economy.

The majority of countries are motivated to maximize their revenue, particularly during economic downturns, whereas the majority of taxpayers are motivated to reduce double taxation. However, the “Wild West” of international taxation does not exist. In order to encourage international trade, the government is working to reduce double taxation.

Governments and businesses make efforts to minimize international conflicts and ensure a fair distribution of the global tax pie through direct coordination or membership in organizations like the Organization for Economic Co-operation and Development (OECD).

Unilateral approaches

Start-ups may benefit from the following unilateral approaches to reducing double taxation.

Some nations do not tax corporations’, residents, or citizens’ foreign income.

A credit for foreign taxes paid on income earned abroad is available in other nations. Additionally, rather than providing credit for foreign taxes paid, some nations provide a deduction.

Bilateral Approaches

Certain types of income typically qualify for lower tax rates under treaties. In order to benefit from the treaty, tax returns may still be required in the United States in order to obtain a reduced or zero tax rate. Terms like these are also given common definitions in treaties, such as:

• What distinguishes physical presence from residence?
• What characteristics should be given to the income source?
• Putting the rights of a country to tax income earned within its borders on a territorial basis ahead of the rights of the country that claims jurisdiction based on nationality. This leaves only residual rights for that country.
• Lastly, a strategy has been developed for resolving international conflicts through the use of a “competent authority.”

Conclusion

Issues of tax jurisdiction must be addressed by start-ups and their founders, owners, and investors who are engaging in borderless Internet and e-commerce transactions, outsourcing intellectual property development, or whose goal is to establish a beachhead in another country and become globally relevant. An international tax practitioner is effectively required to be a member of the advisory team due to the complexities and conflicts of international tax laws. When the company is being formed, the best time to plan for international taxes is now. The proper legal entity for international operations in the United States or elsewhere; When the start-up is being formed, it is best to minimize the global effective tax rate by establishing potential subsidiary entities in multiple nations. Although it is possible to restructure an existing business structure, the process can be very costly and rarely yields optimal results.

An international tax plan can be customized so that it is phased in as revenue is generated during the pre-revenue phase of the startup, provided that the foundation has been properly set up from the beginning. A full-service accounting firm with international expertise that can collaborate with the entrepreneur’s legal team and guide them through the process is highly recommended for entrepreneurs considering starting a domestic or international business. By devising effective strategies to minimize tax liability in global operations, a full-service accounting firm with international experience can assist entrepreneurs who are in starting businesses on a global scale. Such a company should be hired to assist the entrepreneur’s legal team.

Read our Article:A discourse on Corporate Tax Planning